Pro tips for Twitter hackers

There's clearly a pretty strong market opportunity for criminals who aren't complete idiots to reorganize the "hack a Twitter account, send out spam tweets" industry.

Whoever hacked Tyler Cowen's account used it to send out two spam Tweets:"An amazing new weight loss product! It worked for me and I didnt even change my diet!" and "Lose 5 lbs of Fat in a week", both sending the user to some t.co address I dare not hit. It's hard to imagine anybody who follows Tyler would have seen those and thought it more likely that he'd sent them than that his account was hacked.

I would have thought that Twitter account hackers would have run everything through a filter. Anybody with small numbers of followers or low Klout scores would get the lame spam tweets. But Tyler has a Klout score of 60 and about 20,000 followers, including some of the world's top economists and surely some top of the world's top government and central bank officials (among those on Twitter). I would have thought that a flag would go up for hackers that accounts with >10k followers or Klout >50 just might be worth a bit more individualised attention.

What sort of individualised attention? A decent proportion of Tyler's followers would have hit a link recommended by @TylerCowen to something like "This is the new best explanation of how the Euro crisis will unfold". I'm (obviously) not even trying to make it sound like Tyler. Scrape the content from some page from the Economist, FT, Scott Sumner - whatever. Put it on a malware infection site. A thousand really high value computers get directed to the site; maybe you get 250 infections depending on the strength of folks' security settings.

Just flip through the first 50 Tweets and see what's drawn a lot of clicks (hover over a bit.ly link sometime). Based on the feed, I'd have set up malware sites with fake reviews of Tyler's new book (Twitter teaser: Now this review of *An Economist Gets Lunch* is particularly unfair [link]); something on the EuroCrisis, a eulogy to Doc Watson, and something on fear of GMO foods. All of those drew lots of click-throughs. And throw in one like "A handy guide for every central banker as the Euro dissolves." Scrape dummy content into malware sites for each.

So obviously Twitter spammers aren't doing this. Or at least Tyler's hacker didn't. We can then conclude:

• The expected per user returns to malware infections are very low, even for potentially high value infections;
• I'm overestimating how easy it is to do this; cognitive limitations are more binding that I expect.
• Tyler's followers just got a lucky draw; he was hacked by somebody who installed FireSheep and isn't linked into any particularly sophisticated networks. 

The first one's potentially plausible. The second one isn't - somebody will figure it out and will pay more for hacked account login details than will other spammers. The third can be sustained in equilibrium if you've always new hackers downloading FireSheep and imperfect information on who's paying most for hacked accounts. 

Tyler Tweets

If you hacked Tyler Cowen's twitter account, with almost 20k followers, surely you'd do something more interesting than send out a generic spam note about some new diet.

An amazing new weight loss product! It worked for me and I didnt even change my diet! [link redacted]
— tylercowen (@tylercowen) May 31, 2012

What a waste. Given this opportunity, you could either go for lulz or for money.

On the money side, I have a hard time seeing a better play than shorting Spanish or Italian debt and then claiming that you have it on good authority from a central bank insider that default is imminent. There's a slight risk you cause the default by setting a run, but that's more a feature than a bug. Update: On second thought, pushing a penny stock likely gets more cash but fewer lulz.

If you're in it for the lulz, @ModeledBehavior delivers up gold at #TylerTweets - the hashtag Justin Wolfers suggested. I'd put up this:

Tucked away in a strip-mall off Columbia Pike, found a place that serves "long pig". Better than you'd think. Go! #TylerTweets
— Eric Crampton (@EricCrampton) May 31, 2012

But @ModeledBehavior's offerings are much funnier:

Its hard to imagine spoons will exist in their current form in 30 years. What does this tell us about the social discount rate? #tylertweets
— Modeled Behavior (@ModeledBehavior) May 31, 2012

Given what we know about the money illusion, should the moon be destroyed or doubled? The answer is not clear to me. #tylertweets
— Modeled Behavior (@ModeledBehavior) May 31, 2012

#tylertweets cannibalism is wrong, but not for the reasons it's critics say. We ignore the wisdom of cannibals at our peril.
— Modeled Behavior (@ModeledBehavior) May 31, 2012

#tylertweets careful viewers will note Big Momma's House 3 is biting satire of modern central banking. Most underappreciated drama of 2011?
— Modeled Behavior (@ModeledBehavior) May 31, 2012

@ModeledBehaviour, I salute you and your mad surrealist Cowenesque stylings. When you finally decide to make the end-game play with your growing Twitter and blogging audiences, it will be glorious.

Update: It gets better! While everybody who's anybody is playing #TylerTweets and often hitting @tylercowen in their updates, the spammer puts up another lame offering:

Lose 5 lbs of Fat in a week [link redacted]
— tylercowen (@tylercowen) May 31, 2012

What a waste.

RWC losses

Such are the measures of success in hosting international sporting events: The Herald calls the 2011 Rugby World Cup a success for having lost the country only $31.3 million, "$8 million less than they expected." Alas, the article seems not to be online. But as most of the APNZ story seems to come from the IRB press release, you can probably just read that.

I'd be interested in seeing what went into that final "cost to the country" tally. Is it just the cash transfer from the government to the RWC? Local government outlays as well? Costs of diverting a substantial part of the Wellington bureaucracy to supporting the RWC? Stadium expenditures, like Dunedin's mess, where the RWC push was a pretty explicit part of the case for building it?

RWC Minister Murray McCully comments:

"Without a doubt, RWC 2011 will generate significant economic benefits for this country for many years to come."

Sam Richardson points to some different results in Manawatu:

Far from producing a windfall, predicted to be worth between $750,000 and $2.2 million to the city, economic growth actually slowed during last year's tournament.

Proponents of the city's involvement, which included two matches, were "overly optimistic", said economic policy analyst Peter Crawford, and some city councillors are asking whether hosting large events is worth it.

The estimates process got it so wrong because it did not balance the likely benefits against the costs, he said.

One of the costs was the extent to which such a major event crowded out other activities.

I'll look forward to seeing Sam's paper at the NZAE meetings.

HT: Hamish Keith

More on Council asset sales

Christchurch's "Mainland Press" emailed me for comment on whether Council should sell off some of its holdings to pay for quake-related costs. I sent them a few paragraphs they could quote to add to whatever story they were writing; they decided to run them together as an article. I think it reads surprisingly well given that I hadn't really expected that this would be an op-ed piece rather than quotes used in a longer story.

Anyway, here it is.

Open publication - Free publishing - More chch

In unrelated media-grubbing, I was on NewsTalk ZB Tuesday morning talking about how smokers are a net boon to the government rather than a drain on the system.

A sense of priorities

The Press surveys Christchurch residents about post-quake rebuilding priorities. I'm nosing about for the survey raw data, but here's the ranking from Paul Gorman's article. For each, I'm reporting what I think is the proportion reporting the item is at least "important" on a scale running from "Extremely unimportant" through "Extremely important", but I can't really be sure without seeing the survey report.

• Redeveloping the hospital: 97%
• Rebuilding public sports facilities: 91% 
• Tourism facilities: 88%
• New central-city police station: 88%
• Town Hall (mostly a venue for the Symphony): 87%
• Central Library: 86%
• Avon River redevelopment: 81%
• Christchurch Art Gallery: 80% said reopening is "urgent" [no clue how this fits onto the scale]
• Cycle lanes: 78%
• Car parks: 77%
• Rebuilding the rugby stadium: 67%
• Downtown sports centre: 63%
• Commuter rail: 50%

The relative rankings are awfully interesting. Culture and the arts beat Big Sport; local community sports grounds matter more than the New Zealand Rugby Union. And commuter rail is rightly recognized as being way too expensive.

I don't know where the Arts Centre fits on the scale or if it wasn't on the survey. 

It's awfully encouraging to see that most folks have their priorities in a pretty reasonable ordering.

Here, I think, are some of the survey respondents' comments about stadiums. 

Christchurch Kickstarters

Why not use Kickstarter to help preserve heritage buildings in Christchurch? I'd take the "Save the Cathedral" folks more seriously if they put up a Kickstarter page listing the donations already committed and the target they need to achieve to have the Anglicans onside for a rebuild.

Kickstarter, for folks who've not been watching, is an excellent mechanism for solving a very particular problem. Suppose that you have some project, like saving the Cathedral, that can only really work out if you have a set amount of money. And, suppose further that there are lots of small donors, like me, who'd be happy to chip in IF it would make the project work out, but aren't happy to throw money into the pot and not get it back if the project doesn't raise enough money. Kickstarter lets people pledge funds that are only charged against their credit cards IF enough people have pledged enough money to make the project viable. If you don't get sufficient pledged funds by the deadline, nobody pays.

For the economists: you can view this as an assurance contract. Or, if you give a few cheap perks for pledges that go through to pledged donors even if the project fails [maybe like a bumper sticker with a picture of The Wizard on it], it's a dominant assurance contract.

This really can work. For projects where folks get fired up, you can even get massive oversubscription. When a video game maker wanted to remake an old favourite, Double Fine, he raised $3.3 million when he really only needed $400k. If rebuilding the Cathedral would cost $50m, you need a million people in New Zealand each putting up $50. If you net out the large pledges the "Save the Cathedral" folks say have already been promised, it'll be less than that.

Set pledge level perks like:

• $5:          You get a Wizard Cathedral bumper sticker, even if the project doesn't go ahead.
• $10:        All prior perks PLUS Your name goes into the big book of donors.
• $50:        All prior perks PLUS Autographed copy of the Wizard's excellent "Upside Down Map of the World With NZ In The Middle"
• $100:      All prior perks PLUS You get a piece of the old cathedral that couldn't be used in the rebuild in a nice box, like the old bits of the Berlin Wall they used to sell.
• $1000:    All prior perks PLUS You get your name carved into one of the stones for the rebuilt church.
• $25,000: Your face is carved as one of the gargoyles [I have no clue what it costs to carve a gargoyle; scale this one up if needed].

They'd need to have the Cathedral's owners on-side to be able to promise some of those perks. But since Kickstarter only activates once enough money is raised to make the project viable, I don't see this being much of a problem. Surely there's some amount of pledged money that would make the Bishop change her mind. 

I know weekly protests are fun and feel like doing something. Kickstarter could actually work though. Wizard: you start the Kickstarter, I'll put in $50 to help get things going. It isn't much, but I don't have strong preferences between having a rebuilt old-style cathedral in the Square and whatever the Anglicans otherwise wind up doing with their property. 

Really, heritage fans ought to be setting up Kickstarters for all their favourite properties. Could be that there's sufficient demand out there to help fund more preservation than we'd otherwise get. There are a few places around town I'd be happy to chip in to help save, conditional on knowing that I'm only chipping in if it makes the project proceed. That's Kickstarter. I don't know whether we're not seeing Kickstarter used in the Christchurch rebuild because people don't know about it, or because they fear deep down that most people really don't have strong enough preferences to put money on the line. Here's helping to let people know about it so that we can rule out that explanation.

On the Definition of Public Goods

Frances Woolley had a nice post over at the Worthwhile Canadian Initiative yesterday about the textbook treatment of public goods. Her beef is with the use of national defence as the canonical example.

I have a more fundamental beef. Could we please please all agree to change the definition of what constitutes a pure public good. The classic definition is that a pure public good is one that is a) non-rivalrous in consumption, and b) non-excludable.

I want to remove the second of these from the definition. Non-rivalrousness relates to the nature of the good; non-excludability relates to what mechanisms would allow for it to be provided. This conflates two quite distinct ideas and so is not helpful for a number of reasons.

First, microeconomics courses typically move straight from the definition of a public good to finding the condition for the optimal level of its provision (the Samuelson condition in intermediate micro; or, in partial-equilibrium terms, stating that the sum of the willingness to pay should equal the marginal cost). This optimality condition is equally true of any good that is non-rivalrous in consumption, whether it be excludable or not, but that is not the impression you would get reading treatments that show the optimality conditions after imposing a definition of excludability.

Second, non-excludability is neither necessary nor sufficient for public provision to be the only or even the best means of provision: Just because a good is excludable, it does not necessarily follow that it can be profitably supplied by the private sector if there is variation in consumers’ willingness to pay and limited opportunities for price discrimination; and a good being non-excludable does not mean that it could not be provided privately through philanthropy, being tied to other goods, etc.

Third, the standard definition leaves a gaping hole in most (possibly all) textbook treatments of market failures. We typically move from the first welfare theorem (a competitive market outcome is Pareto efficient) to a listing of potential market failures under which the theorem may not hold—incomplete markets, lack of property rights, transactions costs, monopoly, asymmetric information, externalities, and public goods. If public goods are required to be non-excludable by definition, this list is missing a very important market failure—non rivalrous but excludable goods, which might be provided by a private market, but not at the efficient level.

Finally, by conflating properties relating to the provision of a good with properties relating to how it enters consumers preference functions, we add to the likelihood of students thinking that a public good is one that is provided by the government and a private good one provided by the public private sector. And this, I think, leads to exactly the problem that Frances raises: that arguments about national defence being a public good “confounds the abstract—defence, protective services—and real world military spending”.

O.K. So I am not going to be able to bring about a change in the world’s textbooks with this post, but any prospective Canterbury ECON 203 students who might be reading this, please take note: We will be using the non-standard definition next semester!

Wizardish humbug

The Wizard of New Zealand has been leading the "Save the Cathedral" effort. The Cathedral, badly damaged in the earthquakes, is perhaps salvageable; The Wizard wishes that it be saved. Paul Walker rightly notes that unless those protesting the demolition can come up with money for a rebuild, they ought leave the Cathedral's fate to its owners. But I still love The Wizard's eighth-page ad in the Christchurch Press; it's delightfully weird.

The text might be a bit hard to read in the image. The linked PDF should be a bit better; text copied below. I love that New Zealand has a Wizard [Wikipedia] to help make the place a bit weirder.

Wizard's Demolition Order
For the Anglican Bishop of Christchurch

At this time of post earthquake human aftershocks I feel duty bound to call upon the powers invested in me by the Government of New Zealand to take drastic action on behalf of the people of New Zealand and in particular the people of my own city, Christchurch.

My appointment as Wizard of New Zealand by the Prime Minister in 1990 was worded as follows;

"to protect the government, bless new enterprises, cast out evil spirits, upset fanatics, cheer up the local population and attract tourists".

I hereby declare that under section 42 of the Prophets' unwritten manual;
The Bishop will be deconstructed.  
The work will continue as long as any part of her remains in Christchurch.

BACKGROUND 
Like many others living here I have been bothered in the Square for many years by "born again" fundamentalists who threaten me with a hideous fate in Hell if I don't let them pester me with impertinent questions.

As a practising prophet of the Anglican Church I appeared in Cathedral Square from 1975 until 1980 as the "Hammer of the Heretics". For those interested in heresy, most fundamentalists are Gnostics who hate good taste and beauty. I also believe that people who use fear rather than love to recruit followers are actually in the power of Satan. Since he is the father of lies Satan frequently claims to be Jesus and pleads to be let into our hearts.

By 1980 I had driven the last Satanic fundamentalist from the Square, with the exception of the Bible Lady, who was too far gone and more of an amusing pest than a real threat. I never considered my friend the fundamentalist Ray Comfort to be a Satanist. Love poured from gentle, kindly Ray. I miss him.

It's hard enough coping with the destruction and fear caused by the earthquakes. Now our Anglican Bishop shows how much she hates and despises the people of Christchurch. Alas, if that were not enough she is in league with the Holy Joes! A few weeks ago she posed smiling for The Press with a motley bunch if non-Anglican heretics. She was thrilled to bits that they wholeheartedly agreed with her that our spiritual home for 150 years, the world famous Anglican Cathedral, should be torn to pieces and dumped in the harbour!

THE CONDITION OF THE BISHOP 

I have examined the Bishop's foundations and have discovered that they are built on sand. She is in a very dangerous state, being seriously cracked, and I can see no evidence that she can be made safe. Even if it were possible, there would be no point restoring her as she is as dull and bland as her beloved Cardboard Cathedral. Unlike me, she has no attractive Gothic features. But then, Prophets are much more attractive than High Priests.

I can assure the Bishop that she will be very carefully deconstructed. Every piece "will be treated with reverence". The real treasure inside can then be rescued. This treasure is the loving and honest faith of our Anglican ancestors.

For the sake of our traumatised Chapter and Clergy, and Anglicans, both churched and unchurched, I recommend that our next Bishop should be a cardboard figure in Cathedral Square. After a few  years the sight of a figure wearing a Mitre and carrying a Crozier will cease to bring shudders of fear.

Unemployment lenses: Salmond edition

Rob Salmond thinks NZ Prime Minister John Key is playing silly buggers with employment stats. Salmond puts up a graph showing unemployment rates since 2000; it's higher now than it's been since 2000. He's then less than impressed with Key looking instead to numbers of people in employment:

Both in question time and the budget debate last week, [Key] trumpeted National’s incredible jobs achievement:

“… New Zealand now has more jobs that it has ever had in the history of this country. I do not call that failure.” Taddah!

Um, John, more people have jobs now because New Zealand has more people now. It has very little to do with you. Unless, of course, you are about to start taking credit for breeding...

As the chart shows, the number of people in work rises pretty much every quarter, unless there is a large-scale problem like a Global Financial Crisis. More people, more jobs.

The unemployment rate is a much better indicator of government economic management than is the raw number of jobs around.

Then again, what if we did adopt John Key’s “more jobs than ever before” standard for judging government economic success? How would the last two governments perform on that score?  

It's a bit odd that Salmond cuts his data series at 2000; most Stats NZ series go back to 1986. If we extend the data series showing number of persons employed back to 1986, we see a few declines in numbers employed despite there being no drop in year-on-year population growth.* All of my charts are drawn from the Stats NZ HLF series "Total Labour Force Status by Sex by Age Group (Annual-Dec)"**, taking the total for both sexes over all ages [nothing much changes in restricting things to a 20-59 age cohort if you prefer that].

There's a decline in total employment from '87 through '92, a nice rise from '93-'96, a levelling off from '97-'99, then the rise Salmond shows from 2000 through the most recent recession. Note that the y-axis cuts at 1200; this makes dips and rises seem larger than they really are [Salmond's has a similar cut].

But, as Salmond rightly says, total employment really isn't a great measure without some correction for population; we really need to look at the employment rate. So, how's the employment rate doing? Here's the graph:

When I look at that chart, I see an abnormal bulge starting around 2005 - about the period when RBNZ let inflation get a bit out of hand - then levelling down to more more normal ranges. The employment rate isn't higher than it's ever been, but neither is it completely out of whack relative to the full Stats NZ time series or relative to the drop in the employment rate in prior recessions.

And, the unemployment rate isn't as bad as Salmond suggests. Let's start by going back to the start of the data series in 1986 instead of cutting it at 2000.

Put in a bit of a broader historical context, it's not bad. I'd expect that Salmond was cutting things at 2000 to get a rough decade period, but the impression left by the time series sure changes depending on our choice of start date. And, when we remember that the period from 2008 onwards has been rather worse for the global economy than any period since '86, and that the 2002-2007 period was part of a global boom, we might well be reasonably pleased at current outcomes; it's far worse elsewhere. HLFS data has a nice way of showing what lenses folks are using.

Update: Rob Hosking at NBR agrees and adds that, with employment rates this high and wage growth picking up, there's less room for non-inflationary growth. It's also worth remembering that our employment rates stay high and our unemployment rates stay low in part because of the big labour sink across the ditch: it's easy for our unemployed to move to Oz, and it's not always easy to draw them back when things here pick up. But the iPredict markets don't see inflation anywhere on the horizon.

* Update: dumb typo. Of course population growth rates vary. But population always grows. So absolute drops in numbers employed can't be due to drops in population. Last line and link added in too as I realised I'd forgotten to add it and that the post title made no sense without it. Oops. It's also worth remembering that Key talked about numbers employed at least in part because Shearer kept talking about the increase in the number of people unemployed over the last 4 years. Check the links to Hansard in Salmond's post.

** I'm not sure if the Table Builder link will keep working or whether it's using a session ID. I'm using the annual series to get a cleaner x-axis.

Labour's KiwiSaver plans [Updated]

Is Labour considering expropriating the retirement savings of the internationally mobile? Here's Alex Tarrant:

Labour is calling for a discussion about not allowing people to move their KiwiSaver savings out of the country, meaning KiwiSavers could only access their funds if they lived in New Zealand.

... "On the savings front, we’re going to have to consider whether we make our savings sticky, rather than having open borders - people being able to take their savings pool with them to Australia," [Labour Finance Spokesman David] Parker said.

...Currently, people moving overseas permanently from New Zealand can apply to have their KiwiSaver funds paid out to them, minus the government's tax credits. There is a minimum 12 month wait to get the money. 

I really need to see more detail on what Labour's here considering. Right now, those who have contributed to the New Zealand Superannuation Fund via their income tax payments are eligible to receive superannuation even if they live abroad. While the government could perhaps save a bit of money by cutting payments to Kiwis retiring abroad, there are more than a few problems. First, the countries where Kiwis retire might get annoyed by suddenly finding themselves with a bunch of destitute Kiwi elderly who were admitted on the understanding that they'd keep getting a NZ pension. Second, other elderly wouldn't choose to retire abroad; costs to the NZ health system would increase. Changing the default with enough forewarning wouldn't be unconscionable; it's just not that great a policy.

But if they're actually proposing that for KiwiSaver...oh boy.

Recall that KiwiSaver is a government scheme providing up to a $521 annual tax credit* for contributions to a designated retirement savings scheme. Employers make matching contributions into employees' KiwiSaver accounts, though we know by standard tax incidence theory that the statutory division between employer and employee contributions doesn't have huge effects on real incidence. The tax credits were meant as a nudge to get people into private retirement savings; Treasury found that KiwiSaver mostly displaces other savings. Folks have flipped a ton of their private personal retirement savings into these vehicles. If Labour's proposing expropriating them on exit, well, I'd really like Labour to make that explicit, campaign on it, and give me an option to pull everything out of KiwiSaver before they put it into effect.

I really hope that Labour's David Parker was misquoted.

UPDATE: Alex sends me the full transcript. Here's the relevant bit.

PAUL [Holmes]            OK, ideas to stop it [out-migration to Australia]. 

DAVID [Parker]            Capital gains tax, improved savings. You know, on the savings front, we’re gonna have to consider whether we make our savings sticky, rather than having open borders, people being able to take their savings pool with them to Australia. Someone suggested to me the other day - a senior business person - that we’re going to actually have to have a closed system that says once you get universal savings you actually can’t take them with you to Australia. We’ve got such a problem now between income differentials between New Zealand and Australia that we’re gonna have to do better. We’re actually also gonna have to move on inequality, Paul. You know, inequality in New Zealand is rising to atrocious levels, and a capital gains tax helps fix that as well.

So now I'm hoping this was just a silly off-the-cuff answer from an opposition Finance spokesperson rather than Labour policy. Labour's proposed making KiwiSaver compulsory; that, I think, is what Parker's referring to when he says "universal savings". Oh dear.

* Prior to 30 June 2012, the maximum tax credit was $1,043.

Say's Law of Humbug

Demand for that which cannot be done brings forth supply of charlatans. Baum knew it:

Oz, left to himself, smiled to think of his success in giving the Scarecrow and the Tin Woodman and the Lion exactly what they thought they wanted. "How can I help being a humbug," he said, "when all these people make me do things that everybody knows can't be done?

The Munchkins had a latent demand for humbug satisfied by the entrepreneurial Oz.

Chris Dillow points out a nice modern example: demand for expert forecasts. Subjects in Powdthavee and Riyanto's experiment were run through "The System" - a classic scam where you send a random set of stock market or horse betting predictions, toss from the set anyone to whom you sent the wrong prediction, do it again, then offer to continue sending predictions (for pay) to folks who received a few lucky hits in a row. What happened in the lab? Says Dillow:

And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round.

This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting. The authors say:   

Observations of a short streak of successful predictions of a truly random event are sufficient to generate a significant belief in the hot hand.

It's easy to believe that this happens in real life. For example, the people who are thought to have predicted the financial crisis of 2008 are invested with an expertise which they might not really have.

The paper's excellent title? "Why do people pay for useless advice?"

I wonder whether basic training at high school in financial literacy and classic scams might do any good. But it's hard to overcome the demand for humbug. And the paper finds that student subjects with more correct answers in a statistical test didn't spend less on predictions. If these were the results for college students, how awful would a general sample look?

Nudge thyself

The Atlantic points out the many ways we now can nudge ourselves. Your smartphone can become your Skinner Box, with operant conditioning apps to mould you to the You your meta-preferences have always wanted you to be.

But, there's a problem.

Of course, none of these tools would have much of a future if the public continued to harbor the kind of Big Brother paranoia that smeared Skinner’s reputation. Should we be wary of utilities that try to shift our energy use or health insurers that try to change our diets? Skinner would have celebrated these efforts, for their capacity to change society on a grand scale. But at what point does the interest of the individual diverge from the interest of corporations or the government—and will we even notice, if we’ve already surrendered all our choices to our iPhones?

The central irony of Skinner’s theory is that to control our behavior, we must accept a fundamental lack of control, acknowledging that our environment ultimately holds the reins. But an individual choosing to alter his environment to affect his behavior is one thing; a corporation or a government altering an individual’s environment to affect his behavior is another. The line between the two scenarios can blur. Nowadays most of us aren’t likely to wonder about the DOT’s motives when it urges us to take the light-rail instead of a cab. If it benefits the commuter, the government, and the environment, then what’s the problem? But the very definition of the Skinner box is that the inhabitant is not in control. In fact, he may not even know he’s in the box.

As opportunities to exercise our meta-preferences become more readily available, the case against considering internalities a market failure gets ever weaker. Let's just keep the apps optional.

Science Experts

Yesterday's budget included a rather large increase in tobacco excise along with a promise to keep increasing excise over the next few years. So, who does the New Zealand Science Media Centre go to for expert commentary on excise tax increases? You'd expect to see a mix of economists (tax experts, health economists) and a few of the healthists, right? Sorry.

First there's Otago's Professor of Marketing Janet Hoek. She's an expert on smoking as she was lead author on a study that drew strong policy conclusions from a sample of 13 Facebook users.

Next, there's Otago Public Health Senior Research Fellow George Thomson. Thomson coauthored a report on the social costs of smoking with health economist Des O'Dea, so that's only one degree of separation. Thomson mixes some reasonable commentary on the effects of price rises on consumption with scientific discussion of the ethics of "imposing extra costs on addicted individuals."

At least they link to the Treasury RIS.

It's pretty reasonable to conclude that, as far as the Science Media Centre is concerned, economics doesn't make the cut. At least given this reply when I asked why they didn't think of asking economists about a tax question.

@EricCrampton that would be because we are the "Science" media centre. The economic tobacco discussion gets plenty of play elsewhere.
— Science Media Centre (@smcnz) May 24, 2012

NZ Drug read their response the same way I did:

@smcnz @EricCrampton Burn!Economics isn't a science says Science Media Centre. Don't tell me it's an "art".
— NZ Drug Foundation (@nzdrug) May 24, 2012

The Science Media Centre is an arm of the Royal Society of New Zealand. Odd that the Royal Society admitted economist Les Oxley as Fellow if economics isn't a science. And even odder that the Science Media Centre went to a Prof of Marketing when I (quite properly) can't find a single reference to a marketing academic in the Royal Society of New Zealand's roster. Economics degrees are awarded in Faculties of Science around the world; I'm not sure if you could find a single Marketing department able to award Science degrees. [I had mistakenly thought Marketing was exceedingly uncommon in Faculties of Science; turns out, there are more than a few around. Just not in New Zealand or Canada, the two systems with which I'm most familiar. Marketing, done properly like Google's ad placement work, is very much science. I'm less sure that NZ offers that kind of marketing degree. Thanks to Phil, in comments, for correction.]


Last time I wondered about the Science Media Centre's going to healthists rather than economists to ask questions about the GST, they claimed they couldn't find an economist ready to comment. Now they say instead that economics isn't a science. Lovely.

Legal Bleg

RdU (the student radio station here) are going to interview me on Monday morning about the recent decision by Meridian to abandon seeking resource consent for a dam on the Mokihinui river. By way of preparation, I thought I would glance through the Resource Management Act. The thing that struck me was that nowhere in the legislation could I find any implicit statement of what the objective function should be when determining the outcome in a judicial process. Indeed, I could find no mention at all of benefits against which environmental costs should be weighed.

If this is the case, how does the consent process make determinations in cases where the environmental costs of the proposed activity are very small, but the benefits are even smaller; or correspondingly, what if the environmental costs are humongous, but the benefits are two times humongous?

But I am no lawyer trained in where to look for things in legislation, and the RMA is very large. Can anyone help me by pointing to where, if anywhere, benefits are mentioned in the RMA, and where, if anywhere, some attempt is made to set criteria for assessing trade-offs?

9/11 as an Instrument

It's hard to tell in cross-sectional data whether depression is cause, consequence, or spurious correlate of risky sexual activity. Susan Averett and Yang Wang try to figure it out in the latest AER. Their trick? AddHealth data collected over a period that spanned 9/11 that lets them use the terrorist attacks as an instrument for depression.

Some summary statistics:

Our full sample consists of 4,151 women aged 18 to 26 years. Most of our respondents are white (68 percent) or African American (25 percent). The average years of education are 13.5 and the average age is 21 years. Thirty-five percent smoked for at least 30 days in the past year, and during the year before interview 72 percent of these women drank alcohol and 31 percent used marijuana. Selfrated health averages 2.05, which is slightly worse than “very good.” The mean CESD score for the nine questions asked in the Wave III 95 percent of these women are sexually active in their relationships. Sixty-seven percent and 11 percent of them engage in oral and anal sex, respectively. Fewer than 2 percent of the women in our sample report using condoms.

An active sample. And, an active sample that showed a sharp jump in depression scores in the period right after 9/11. They then use 2SLS with 9/11 as instrument and find that OLS estimation underestimates the effect of depression on participation in risky sexual activity.

So a one point increase in the CESD (depression) score correlates with a 0.4% increased likelihood of vaginal sex by OLS, but a 2.1% increase by 2SLS - and a 1.9% reduction in the likelihood of using a condom. 

It's worth keeping this kind of result in mind when we hear findings that alcohol use correlates with risky sexual behaviour [and, let's not forget, with more positive consequences of sexual experiences]. If depression correlates with heavier drinking, then it's pretty easy to conflate the effects of alcohol with a covariate, like depression, that drives both drinking and risky sexual practices. 

A footnote

A switch from passive to active voice would have had me as a footnote to the tobacco excise increase RIS:

On the narrow  fiscal  grounds of covering the costs smokers impose on government, further increases in tobacco excise may  not be justified.  At over $1.3 billion per year, tobacco excise revenues may already exceed the direct health system costs of smoking¹⁰.  When the broader fiscal impacts of smoking are considered (eg shorter life expectancy reducing  smokers’ superannuation and aged care costs), smokers are probably already “paying their way” in narrowly fiscal terms.

¹⁰. A recent Ministry of Health study estimated health costs of smoking at up to $1.9 billion per year (15% of the Vote Health).  While this estimate used more detailed data analysis than previously available to estimate health costs, it is well above previous estimates (a  2007 estimate put the cost of smoking to the health system at $300-$350 million per year) and its methodology for comparing lifetime health care costs has been contested. [emphasis added]

I still contest that measure as it relies on an assumption that smokers otherwise would never impose end-of-life costs on health budget. I also have an OIA in for more of the background workings on the $1.9b estimate.

A very simple calculus

Financial cost of a pack-a-day smoking habit over the course of a pregnancy:
$13 * 266 days = $3,458.

Financial cost of a Sky Sport package over the same term: $731.

Financial cost of the best obstetrician team in Christchurch: you'll have to ask them, but Ira cost $2k in 2008 and Eleanor cost $2500 in 2010.

Cost of having a midwife-only birth under New Zealand midwife training standards: potentially unfathomable.

If you or somebody you care about is pregnant, recommend a shared-care option with a good obstetrician. It is damned cheap. One person in the extended family quitting smoking for the duration pays for the best obstetrician in town. Four friends giving up Sky for the duration works too. Even among the poorest deciles, is there really nobody who cares enough about an expecting mother to give up smoking for long enough to cover an obstetrician's fees?

I expect the main problem is that, in the low decile groups, folks tend to figure that whatever the government gives them must be good enough. It really isn't. High social capital rich folks know to call around immediately on finding out they're pregnant (or even earlier) and snap up the midwives with proper nurse's training. Low-decile folks wait 'till they're several months along and take what's left, not knowing that there are differences in qualifications among midwives and that the bottom tail of the distribution is abysmal.

Update: @harvestbird gives an updated price schedule:

@EricCrampton It's $3K+ GST now for that team but, for the reasons you articulate, worth every cent.
— Megan Clayton (@harvestbird) May 23, 2012

Experiment on prisoners!

National's announced what sounds like a decent measure to reduce alcohol-related crime: better rehab treatment in prisons for offenders.

Budget 2012 will contribute to a 25 per cent reduction in reoffending by 2017, and 18,500 fewer victims of crime every year from 2017, Corrections Minister Anne Tolley and Associate Corrections Minister Dr Pita Sharples say.

The moves are part of the Prime Minister’s expectations for a more efficient and results-driven public service.

A boost in alcohol and drug treatment, alongside increased education, skills training and employment programmes for prisoners, including remand prisoners, will lead to safer communities and better value for money for taxpayers.

From 2017, there will also be 600 fewer prisoners in jail than in 2011, and 4,000 fewer community offenders.

“It’s time to get serious about breaking this vicious cycle of prison and reoffending,” Mrs Tolley says.

There have been a few stories out over the last few years about lack of availability of treatment options for offenders who have wanted to seek treatment; increasing availability is likely to help those offenders. But it would likely be wrong to extrapolate from results achieved by those seeking treatment to those that could be achieved among those who would be compelled to seek treatment. So while I'm not convinced that Tolley's projections around reductions in reoffending are right, it still seems a policy worth trying.

Even better, it's a policy possibly worth trying as a randomized control trial. If the total amount of funding available isn't sufficient to give drug and alcohol rehabilitation treatment to everyone they might wish to have it, or to provide employment and reintegration support to all prisoners leaving prison, randomize who gets to participate. Here's one potential approach.

Set up three groups for each type of intervention. The first is a control group - no treatment. The second is compelled to participate, but they get a lotto. Those wishing not to have treatment can ask for it, and some of those wishing to opt out will be able to opt out. The third gets a lotto: those wishing to select into treatment can ask for it, and some of those opting for it will get it.

What does this kind of design let you do?

1. What's the value of treatment for those who want to have treatment? Compare outcomes for those who indicated they want treatment but didn't get it with outcomes for those who won the lottery.

2. What's the value of treatment for those compelled to have treatment? Compare outcomes for those who are forced into treatment against their lottery-expressed wishes with those who are allowed to opt-out of compelled treatment.

3. What's the effect of changing the default option? Compare average outcomes between the two lottery treatments.

4. What's the average effect of compulsory treatment? Get the average rate of "wanting to be treated" across groups 2 & 3, the effect of treatment on the "want to be treated" groups in 2&3, the average rate of "not wanting to be treated" across 2 & 3, the effect of treatment on that group, take the weighted average outcomes across both, and compare to the control group. This would be what we'd expect as effect of a blanket "must be treated" rule.

It's great that the government's looking at targeting one of the real sources of alcohol and drug related external cost. It would be even better to set it up so we could learn something!

Alas, the Ministry of Justice and the Corrections Minister would likely have a hard time getting this done under the auspices of any of the universities due to likely quibbling from Human Ethics Review panels. But I'm sure there'd be a few folks around who'd find it interesting enough to do as a side project.

Present discounted value, explained slowly

Suppose that you own an asset that gives you $100 per year annual income net of any costs of ownership. Would you be a fool to sell that asset and forego that revenue stream? Well, it depends on how much money you would be given for the asset and what you would do with it.

If your best possible use of any raised funds is a RaboBank term deposit at 6%, and if the net earnings flows are comparably risky, then if somebody's willing to pay you at least $1667 for the asset, you're better off selling it. Otherwise, you're better off keeping it. If somebody offered you $1000 for it, you'd get $60 per year in interest. That's less than $100 per year. If somebody offered you $2000 for it, you'd get $120 per year in interest. That's more than $100 per year. Whether you should sell off the asset depends on how much somebody else is willing to pay for it.

So, what's somebody else willing to pay for your asset? That depends on what they could do with it. If others reckon they could earn more from your asset than you are, they could bid the price up to a point above $1667. If they think they could earn less, they'd offer less. So whether you should consider selling the asset really depends on whether somebody else could make more money from it than you can. If they could, they'll pay you for the privilege, and you'll both be better off.

This has, perhaps, been overly pedantic. But when folks' main objections to asset sales are losing the flow of dividends, pedantry seems necessary. Here's Christchurch Mayor Bob Parker.

The strategy does not propose the sale of any city-owned assets, including our shares in companies such as Port of Lyttelton, Orion or Christchurch International Airport Limited. This Council has recognised the importance of retaining these assets, which provide valuable dividends each year and offer an alternative revenue stream to rates alone.

As part of our usual business practice, the Council keeps an eye on the value of our assets and the returns they yield. At this stage, when you look at the annual revenue we receive from these companies, it just does not make financial sense to consider selling them for a short-term profit.

Where an asset is more efficiently owned by the public sector, then the one-off return from selling the asset will be lower than the value of the dividend stream. But how many assets really fall into that kind of category? Christchurch Council used to think private management of Lyttelton Port was a good idea; they wanted to bring in Hutchison Port Holdings as strong minority owner and manager of the Port. It wound up being blocked, if I remember correctly, when Lyttelton's main competitor, Port Otago, acquired a blocking interest to prevent the sale; they seemed to be worried that Lyttelton would be more competitive under private management.

Before the earthquake, with a different Mayor, Christchurch thought it a really good idea to sell off just shy of a controlling interest in the Port to a foreign specialist in ports. They saw opportunities for better management with specialist interested assistance. Now, after the earthquake, when Council's a bit more desperate for money, Mayor Bob Parker thinks it short-term thinking to sell off even part of Lyttelton Port? Remarkable.

If the quake has made it more expensive for Council to raise debt financing, then surely that also makes partial divestiture of some current Council assets more attractive. Council owns 75% of the airport. Is there something magical about 75% that made it the right ownership fraction both before the earthquake and afterwards? Mightn't it make sense to trade some of Council's ownership of the Airport, Port, and Red Bus for Council ownership of improved roading, sewerage, and water infrastructure? Or to help build a park and bike paths along the Avon that don't provide a financial return but improve quality of life? Or maybe to help them rebuild the torched kid's play structure in South Brighton Park that's been sitting behind a fence since January and otherwise ignored by Council but asked about by my children every single time we go to use the swings there?* Surely there are some current quality of life issues that are worth more than having an extra 5% of the airport. Am I a heartless neoliberal because I think it just might make sense on equity grounds to fund partial temporary rates abatement in the more earthquake affected parts of Aranui and Bromley by selling off a few percent of Red Bus and canning the plans for an expensive new stadium and convention centre?

Yes, selling Council-owned assets gives us money now and less money later if we spend it on current consumption or lower rates. That's a trade-off worth making after an earthquake so long as the selling price for the assets is reasonable.

* Update: The Christchurch Mail, in my mailbox this evening, reports Council's planning on starting work on it; it might be ready for next summer.

Effective advocacy

I suffered a few "banging my head on the kitchen counter"-related injuries yesterday afternoon while listening to Afternoons with Jim Mora.* Waimate District councillor Sandy Mulqueen was talking about her support for marijuana law reform (starting around the 18 minute mark here). Things started well, but then started downhill. Apart from the absurd claim that prohibition is almost making the marijuana plant extinct, we then got into the too-typical blend of odd anti-business sentiment** and perhaps overenthusiastic support for marijuana's potential medicinal benefits.***

Things went very sharply downhill from there with proposals for drinking licences, marijuana licences, and sex licences to encourage personal responsibility.

And, at the 23 minute mark, she started talking about how, when she was a bus driver long ago, she often was stoned out of her mind, [Update: I'd heard "drove a lot stoned" rather than "drove stoned, a lot"; the latter speaks to frequency rather than intensity. Now corrected.] and that it improved her driving. Then she talked about how both her kids support legalization despite that her daughter started smoking marijuana at age 14 and that it may have helped contribute to a mental breakdown.

I would have thought that:

• the cannabis reform movement could field better advocates
• Candidates for local councils who advocate driving while stoned would have a hard time being elected. I guess I don't know much about Waimate.****

Despite all that, the Stuff poll accompanying the story currently has majority support for relaxing the drug laws, either to decriminalisation or to legalisation.

Legalise marijuana, regulate it like alcohol and tobacco, set an excise tax to keep the selling price to consumers equal to that currently paid by consumers. If the policy goal is demand reduction, excise is a less harmful means to that end than is prohibition. And maintain criminal penalties for driving while stoned out of your mind. Is it really that hard to say that 25 second bit without descending into madness?

* Who my kids love as narrator on "The Adventures of Massey Ferguson"; we've bought both DVD box sets. You should too, especially if you're not from NZ and want a slice of awesome NZ programming for the under-4 set.

** we can't let big business grow it or let big tobacco muscle in, maybe Councils could grow it, etc

*** At one point she argued everybody should smoke it; I'm happy to believe it really helps with some medical conditions, but I'd be a bit reluctant to say it's great for everybody.

**** A colleague, originally hailing from Waimate, writes: "Everyone from Waimate has a bus story. Our bus driver stole the bus one morning and headed South. Made it as far as Invercargill I think. I was waiting at the bus stop for a while...."

Treasurenvy

Tomorrow is budget day here in New Zealand. What's going to be in the budget? Ask iPredict. But if you want the data at 2 PM tomorrow when the budget is released, download the Budget app this afternoon! I'm pasting the Treasury site below. If your Treasury hasn't got an app for your budget, why not?

NZ Budget App

Page updated 22 May 2012

The Treasury is launching the NZ Budget app for Android, iPhone and iPad to coincide with Budget 2012.

The app provides Budget-related video, Ministers' media statements, the Minister of Finance's Budget speech, the Executive Summary and Key Facts for Taxpayers.

Tablet versions of the app also provide the Fiscal Strategy Report and Budget Economic and Fiscal Update (BEFU).

Read the related media statement by Hon Bill English, Minister of Finance, on the Beehive website: Budget 2012 goes high tech with new app (22 May 2012).

How to Get the App

The app will be available late on Wednesday afternoon. On your device you will be able to go to the App Store or Google Play and search for NZ Budget.

There is no charge for the NZ Budget app.

How the App Works

The app is not loaded with Budget 2012 data but receives it from a Wellington-based server after the embargo ends at 2pm on Budget day, 24 May 2012.

Until the embargo is lifted the app will not show any information. When Budget 2012 is released on 24 May, the app will automatically update and start to display Budget 2012 information.

The app will not contain all of the Budget 2012 information released on Budget day. For example, the largest Budget documents - the Estimates of Appropriations 2012/13, the ten sector volumes of the Information Supporting the Estimates 2012/13, and the Supplementary Estimates and Supporting Information 2011/12 - are not available on the app.

These Estimates documents and other Budget 2012-related material will be available on the Treasury website's Budget 2012 home page at: http://www.treasury.govt.nz/budget/2012.

The illustration on this page is a sample screenshot of the NZ Budget app on an iPhone using a chart from the Key Facts for Taxpayers from Budget 2011.

Feedback

The Treasury welcomes feedback on the NZ Budget app.

BERL and asset sales

The Greens commissioned BERL to look at the government's planned set of asset sales.

Recall that I've previously argued that the "but the bond financing cost is lower than the flow of dividends" argument is nonsense because it says the government should borrow to invest in the stock market where stock returns are higher than what the government pays in interest; it ignores that stocks are riskier assets than New Zealand government bonds.

What really matters is whether an asset is better managed publicly or privately. If the assets are more efficiently held publicly, the "loss of flow of dividends" critique can make sense: in that case, a private owner is willing to pay less for the shares than the flow of dividends is worth to the government. Otherwise, a high dividend flow just means the asset's selling price is bid up. If the private owner expects efficiency gains, competitive IPO markets push the asset's selling price to being higher than the discounted value of the current revenue stream.

So, how does BERL approach the problem? They assume that revenues from asset sales are used to build other assets that yield dividends equal to the returns on the sold assets but that time-to-build means a few years' delay in getting the flow of assets from the alternative stream. It's then not particularly surprising that they find that asset sales are a dumb idea. It would be hard to find anything other than "privatization is a dumb idea" given that starting point. They also assume that borrowing costs are lower than dividend yields and conclude that it makes more sense to borrow than to sell off assets. They do some year by year projections going forward on the basis of the assumptions, but all that time path depends on the question-begging at the outset; I'm not going to get into whether they got the time series right.

BERL also seems pretty worried about effects on the country's net external debt position. So they set up scenarios comparing asset sales, where buyers may be foreign or domestic, with a bond issue, where bonds are assumed to be bought only by domestic investors. On this basis, they find that the asset sales will hurt net foreign liabilities. Perhaps their conclusion would have changed if they considered that foreign investors do sometimes also buy our government's debt, or that domestic investors can on-sell government bonds to foreigners.

Further, when BERL makes the case for debt over asset sales based on the difference between the government's cost of borrowing and the dividend yield from state owned enterprises, they don't seem to adjust for that dividend yields tend to be higher because asset owners need a risk-based return. If it doesn't make sense to take out a mortgage on your house at 5% because you can buy stock in a company that usually pays 6% dividends, it probably doesn't make sense for the government to do it either.

As a fun robustness check, they compare their results against a scenario where the new investments yield lower dividends than the new investments. Unsurprisingly, they find that privatization is then even worse!

I'll agree with BERL that some of the benefits of partial privatization seem overwrought. I've been critical of partial privatization, and especially of starting with the energy companies. But if this is the best case against partial privatization that the Greens can come up with, it sure isn't convincing.

Previously:

• Perils of partial asset sales
• Partial Privatisation: Hazledine (vs?) Crampton edition.
• Selling assets to pay for the quake
• Optimal quake financing
• Don't sell the lines company, sell the Port.
• Sell it already
• Seamus: Justification for partial asset sales
• Seamus: Should Meridian be Privatised
• Me in response to Seamus: Voter Preferences and Electricity

Sell it already

Christchurch Council is again being encouraged [see also NBR] to consider selling off some of its holdings to help pay for the earthquake rebuild. Labour is predictably outraged:

Labour Party SOE spokesman and Christchurch-based MP Clayton Cosgrove said Carter's comments on Sunday "proved beyond doubt central government’s intention to see Canterbury’s assets sold off."

“This issue was raised over a year ago when the CERA legislation was before Parliament. This was not a part of the deal. The Minister’s rationale - that councils should sell down infrastructure to survive - is ludicrous," Cosgrove said.

“These are revenue generating assets which have sizable returns for the whole community. Selling these off to fulfil National’s agenda is foolish," he said.

"This is a nationwide issue. Selling revenue generating highly profitable assets which are providing a solid rate of return at a local level is about as logical as National’s plan to sell our revenue generating state-owned assets.

“Canterbury’s profitable assets have kept local rates in check. To hear the Minister say that he would rather give up that revenue stream to pay for the disaster that has befallen our City makes a mockery of the Government’s commitment to Canterbury’s recovery," Cosgrove said.

Cosgrove can only be right where the asset is more efficiently owned by local council, or where there are serious problems in IPO markets, or where the Council has a particular kind of stupidity.

If the asset is best owned by government, then the selling price will be less than the discounted value of the dividend flow. Otherwise, local Councils can do better by selling off the asset and taking the cash.

If there are serious problems in IPO markets, then things sell for less than fundamental value at IPO. But there's no particular evidence of this.

The last one might be more of a worry. Imagine a guy who has a trust fund that pays him a modest annual income. He generally is foolish in how he spends it, but he's always able to pay his bills. If he is given the investment as a lump sum, he blows it all on pop rocks and bungee jumping and has no income flow for the next year. That guy is probably better off not being able to sell off the dividend-paying asset. Is Christchurch Council that guy? Hopefully not. But post-quake, unless they're dumb enough to blow it all on stadiums, there are tons of productive ways they could be spending the money - roads, sewers, turning Red Zone into useful parks.

And, if Council is dumb enough to blow any divestiture returns on pop rocks and stadiums, are they smart enough to handle the asset properly if they own it in the first place? Note that an asset like the Lyttelton Port of Christchurch isn't like a hands-off trust fund; it requires annual decisions about asset maintenance versus dividends. Cosgrove talks about how the revenue stream from assets helped kept rate rises in check; what reports I'd heard on maintenance standards at the Port as of a few years ago suggested that Council was putting a fair bit more weight on current dividend flow than on maintaining the assets. Divestiture may be a bad idea if Council is prudent enough to manage the asset properly while they own it, but profligate if they're handed a lump sum of cash; under the current circumstances, with plenty of really pressing financial needs, I'm less worried about this one.

Previously:

• Perils of partial asset sales
• Selling assets to pay for the quake
• Optimal quake financing
• Don't sell the lines company, sell the Port.

Education isoquants

Draw a graph. On the Y axis, put "smaller classes"; on the X axis, "teacher quality". It's not hard to imagine standard isoquants in that space where you can produce a fixed amount of educational output either by having worse teachers in smaller classes or better teachers in larger classes. I know neither the slope of the isoquants nor the slope of the isocost curve that would run between them, but Andrew Leigh reckons Australia pushed itself onto a lower isoquant by shifting from larger classes with better teachers to smaller classes with worse teachers.

The other challenge is to boost the performance of Australia’s educational institutions, particularly our schools. In research with Chris Ryan, we found that Australian literacy and numeracy scores had failed to improve from 1964 to 2003.[24] Since then, Australia’s scores on the international PISA test have fallen. At the same time, the academic aptitude of new teachers – relative to their classmates – has declined.[25] One possible reason for this is that Australia chose to focus on reducing class sizes rather than attracting the best teachers. Over the past quarter-century, class sizes have been cut by about 10 percent, while teacher salaries relative to other professional salaries have also been cut by about 10 percent. [emphasis added]

New Zealand's National Party proposes moving towards the larger class - better teachers combination; they're trying to draw in better teachers with merit pay. Says Leigh:

I have a particular interest in performance pay, having given a keynote address at an economics of education conference in Munich, in which I summarised what we know about the economics and politics of merit pay.[26] From that, I concluded that anyone who says that merit pay ‘always works’ or ‘never works’ hasn’t spent enough time engaging with the literature. There are clearly merit pay models that are successful, and those that are unsuccessful. The challenge is to build the evidence base to the point where we can confidently tell the difference.

Here's hoping New Zealand's implementation winds up being on the successful side. Bill Kaye-Blake notes, probably rightly, that the amount of money available as merit pay will have to be reasonably large.

Update: Note that Andrew Leigh, quoted above, is not only a top-notch economist, he's also an Australian Labor MP. It's well worth reading his whole article on merit pay.

Maybe we needed a bigger earthquake

Paul Krugman credits the Japanese earthquake/tsunami with high current Japanese growth rates:

Wait, what? Japan as star performer? What’s that about?

Actually, no mystery. From Bloomberg:

Japan’s economy expanded faster than estimated in the first quarter, boosted by reconstruction spending that’s poised to fade just as a worsening in Europe’s crisis threatens to curtail export demand.

So Japan, which is spending heavily for post-tsunami reconstruction, is growing quite fast, while Italy, which is imposing austerity measures, is shrinking almost equally fast.

There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …

I'm not a macroeconomist, so there are reasonable odds I've got things wrong. But I would have thought we'd have needed to think a bit more about how a fiscal push gets funded and about any likely reaction from the reserve bank.

Oughtn't there be a reasonable difference between a tax or debt-funded fiscal expansion and one paid by reinsurance inflows? I'm not sure that we can jump from "the Japanese government is spending a lot" to "Japan's growing" without looking at where the money's come from. A tax-funded spending programme will take money out of other parts of the economy; a debt-funded one might induce people to offset government spending with greater savings in anticipation of future taxes. Even if you think it's worthwhile, the effect of spending will be smaller than it would be where the money came as windfall in exchange for wealth reduction. A fiscal push paid for by domestic insurers selling off assets and by inflows from international reinsurers ought to look a little different from one funded by tax or debt; the GDP effects of tsunami-scale spending programmes in Italy or Greece might be comparable to Japan's if they were paid for by selling off little used assets, like some of Greece's uninhabited Adriatic islands.

New Zealand has its own earthquake rebuilding project: Christchurch. While 2012Q1 figures aren't out yet, fourth quarter 2011 had a year-on-year growth rate of 1.1%. And iPredict's picking quarter-on-quarter growth rates between 0 and 0.5% for most quarters all the way through to December 2013, with reasonable risk of bad outcomes for 2013Q4 - one chance in three of growth rates lower than -0.5%. New Zealand's perhaps making it look hard because of the morass of bureaucracy and insurance that's holding things up, combined with lingering worries that a one-in-four chance of another really big aftershock might mean we're best advised to wait on any big building projects anyway. I doubt that the problem was that the quake just wasn't big enough.

Further, any earthquake-related fiscal push also needs an accommodative central bank for expansionary aggregate effects. Here, a fast rebuild push would very likely push up wages and prices in related sectors, at least until we started being able to bid workers back from Oz. We'd also be pushing rents up for temporary workers, which would feed through into national rental markets as displaced Christchurch folks facing a short term vertical housing supply curve moved elsewhere. And then the RBNZ might start having to put the thumb down.

Bottom lines from a non-macroeconomist:*

• Earthquakes are hardly sufficient for macroeconomic stimulus. There's evidence that Canterbury's seeing decent growth relative to the rest of the country, but aggregate national figures are hardly rosy and construction hasn't been particularly helping things. December quarter 2011 had a 2.5% increase over the prior quarter, but only after substantially negative results for the prior three quarters (ie from the quake onwards). See Table 2 of the Excel sheet. Table 3 tells us construction's contribution to GDP is up in 2011 on 2010, but is still lower in real terms than in any year from 2006 through 2009. I suppose earthquake construction booms also operate with long and variable lags.
• Running a big fiscal push doesn't help anything if the Reserve Bank is then just induced to offset. And if you have to get the monetary authority onside, why not just run it as a monetary expansion in the first place? Cowen says the potential for monetary fixes is weakening, but I'd expect the same case to hold against broad fiscal AD pushes as well. And recall that what Krugman means by "austerity" is perhaps not what is commonly understood.
• It makes a lot of sense for New Zealand to borrow heavily to fund the earthquake rebuild and to divert some money from other useful projects, with longer term tax increases and spending shifts to make up the difference. That the coming budget is almost certain to do nothing about longer term structural issues like the retirement age isn't going to help make room for earthquake-rebuilding debt. 
• The quickest way to make room for the RBNZ on interest rates is getting legislation giving effect to the Productivity Commission's recommendations around housing and land use regulation. We're seeing housing prices ramping up again; Auckland median values are now well above the 2007 peak and aggregate values aren't far below it. Price inflation in non-tradeables like housing and fear of setting off another housing bubble could be constraining RBNZ against interest rate cuts. In the last housing run-up, from 2003 through 2007, year on year CPI measures in the "CPI less housing non-tradeable items" series is about twenty percent lower than the full CPI. RBNZ will have more room to accommodate where housing costs are less of an issue. This obviously matters for any monetary push but matters too for any fiscal stimulus because RBNZ moves last and has to offset fiscal moves that look set to push medium-term CPI above 3 percent.**

* Full disclosure: I was very seriously wrong about macro policy in early 2008 when I thought RBNZ was cavalier about a persistently high CPI when instead they had better foresight about the coming maelstrom; I'd calibrated around RBNZ responses to inflation rates circa 2005-6. So discount as you reckon appropriate.

** They've also been looking to other potential tools for damping housing price run-ups.

Shoe Entrepreneur

I'm not a shoe guy, but I do love this story of entrepreneurial achievement.

Ferragamo started as a bootmaker for Hollywood films, found some of his customers still found the boots uncomfortable, went to the University of Southern California to learn about anatomy and weight distribution, then invented arch support.

Go read the whole thing. And think about economic geography. Hollywood provided base demand for the product, high end clientele to buy his private designs, and a university where Ferragamo could pick up the skills he found he needed to improve his product. As an immigrant, he maintained ties to Italy and went back there to combine adapted American production techniques with cheaper artesianal skilled labour and developed something entirely new for export back to America.

HT: @Isegoria, whose Twitter feed most regularly delivers me delights I'd not otherwise seen. #FF